Resolution no. 4.656/2.018 published by the Brazilian Central Bank on 26 April, which regulated credit fintechs in Brazil, opens the door of the highly concentrated banking sector in Brazil, so that financial technology companies can offer products and financial services in the credit market. Today, credit fintechs already operate in the financial market, but always through a financial institution duly regulated by the Brazilian Central Bank (CB).
With this new regulation, two types of financial institutions with different business models were created. They are: the "Sociedade de Crédito Direto" (SCD) ("Direct Credit Company"), which will carry out credit operations only using its own financial resources, and the "Sociedade de Emprésimo entre Pessoas" (SEP), (Peer-to-Peer Loan Company), which will carry out credit operations only as a financial intermediary without retaining risks or using their own resources, known in the market as "peer-to-peer lending". Both institutions, after approval by the Central Bank (CB), will be authorized to operate, only, through an electronic platform.
The aforementioned Resolution no. 4.656/2.018 has great potential to cause bank interest rates to fall and to intensify the supply of loans and financing with lower rates, increasing the competition with the big banks that currently dominate the Brazilian market.
Compared with the initial draft published by the Central Bank in August 2017, the new draft approved by the CMN that led to Resolution no. 4.656/2.018 is clearer, facilitated the process of authorization of the credit fintechs before the Central Bank and also described in more detail how investment funds can collaborate and interact with these technology companies. In the draft approved by CMN, the technical interview and the need for an indication of a "technically qualified professional" to accompany the authorization process before the Central Bank were excluded, both of which were contained in the draft previously made available by the Central Bank through public consultation no. 55/2.017.
According to the new Resolution no. 4.656/2.018, the authorization procedure before the Central Bank is the same for both the "Sociedade de Crédito Direto" (SCD) and "Sociedade de Emprésimo entre Pessoas" (SEP). Both must be constituted as corporations with capital of at least 1 million reais. In order for the request for authorization to be analyzed by the Central Bank, the resolution requires that the credit fintech submit a "substantiated justification, which in practice is a business plan, which should include the following information about the enterprise: 1 - services to be provided and eventual interest in issuing electronic currency; 2 - target audience; 3 - market opportunities that justify the enterprise; 4 - competitive differentials and; 5 - systems and technological resources to be used
In addition to the "substantiated justification", the application to be submitted to the Central Bank shall contain: 1 - identification of the persons that make up the economic group; 2 - identification of the control group or of holders of qualified shareholdings; 3 - information related to the investment fund, when this participates in the control group; 4 - proof of the origin of the financial resources used in the project; 5 - demonstration of economic and financial capacity compatible with the plan indicated in the " substantiated justification" and finally; 6 - authorization signed by the main members of the fintech allowing the Central Bank and the Federal Revenue Department to provide banking and tax information for these persons in order for such data to be part of the authorization process.
In the authorization process, the Central Bank will evaluate in addition to the mentioned documents, if operational and prudential requirements, proportional and compatible with the size and profile of the fintech, have been observed.
With regard to investment funds, in accordance with Resolution no. 4.656/2.018, they may be part of the economic group that will influence the management of SCD or SEP in two ways: through the "control group", that is, when the fund owns the rights of partner corresponding to the majority of the voting capital or; by means of a "qualifying holding", that is, when the fund holds a direct or indirect interest equivalent to 15% (fifteen percent) or more of the shares representing the capital stock of the SCD or SEP.
Resolution no. 4.656/2.018 expressly prohibits the administrator and the investment fund manager who is part of the control group or holds a qualified holding from holding positions in management bodies in the respective institutions (SCD or SEP).
Also with regard to investment funds, the resolution allows the SCD to sell or transfer its credits, originated in the electronic platform, to Investment Funds ("FIDCs") whose quotas are exclusively destined to qualified investors. The sale or assignment of SCD's credit rights may also occur to financial institutions and securitization companies.
The resolution also authorizes the Investment Funds ("FIDCs") to operate as creditors on the electronic platform of the SEP, provided the shares of the FIDCs are intended exclusively for qualified investors.
In addition to providing greater legal certainty for creditors and borrowers, Resolution no. 4.656/2.018 will also provide greater predictability for domestic and foreign investors interested in investing in Brazilian credit fintechs.
For fintechs, investments are essential if they are to be more competitive, gain scale, serve more customers and develop new technological products, thus promoting innovation and stimulating the participation of new entrants in the financial market. The new rule has immediate application, enabling the companies concerned to initiate the authorization process.
Daniel H. C. Alvarenga is a partner of Noronha Advogados, in the Banking and Securities department, specialized in "International Investment Law" by King's College London and in Structures and Business Operations by FGV-Direito.
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